The pros and cons of accessing your pension whilst still employed

When you access your pension for the first time, will you still be working? Just a few years ago, it would have been a rare occurrence, but now half of people flexibly accessing their pension are still employed. Whilst it does have advantages, it could mean spending too much too soon.

So, why is this trend happening?

Pension Freedoms were introduced in 2015 and mean pension savers can typically access their savings from the age of 55, whether they’re retired or not. Over the last four years, figures suggest this greater flexibility is something that’s been quickly embraced by savers. Not only do Pension Freedoms mean the money can be accessed at 55, but there are more ways to take an income too. In the past, most people with a Defined Contribution pension would have had to purchase an Annuity to create a guaranteed income for life. Today, there are several other options, including using Flexi-Access Drawdown to take an adjustable income. It means pension withdrawals can be adapted to suit different lifestyles.

How many people are accessing their pension whilst working?

Research from Zurich estimates that half of people taking a regular income from a pension in drawdown are employed, either full or part-time. This is the equivalent of 300,000 people. Yet, in many cases the additional income isn’t needed:

  • 55% of full-time workers admit they could live comfortably without the extra pension cash
  • 29% of part-time employees say they don’t need the pension income to live comfortably

The findings have led to concerns that some over-55s could end up burning through their pension savings too quickly, potentially leaving them financially vulnerable in the future.

Alistair Wilson, Zurich’s Head of Retail Platform Strategy, said: “Savers drawing a pension income they don’t need yet are in danger of leaving a black hole in their finances when they eventually hit retirement. They could also be landed with a hefty tax bill if their pay packet and pension income push them into a higher tax bracket.

“It can be tempting to tap into your pension early, but if you can afford to leave the money invested, where it can keep growing tax-efficiently, you could build a bigger pot when you fully retire.”

The benefits of accessing your pension whilst in work

1. Pay off debts

If you’re still at a point in your life where you have some debt, taking some money out of your pension to repay this can certainly seem attractive. Whether you want to pay off the remainder of your mortgage or clear credit cards, using your pension can be effective and help free up your income now and in the future. It’s important to look at the level of interest you’re currently paying, how this compares to investment returns, and whether you’d face any additional deductions for either withdrawing from a pension or paying debts early.

2. Choose a phased retirement

Suddenly giving up work one day is becoming a less popular option. Pension Freedoms mean retirees are increasingly choosing to take a phased approach. This may mean cutting down hours in your current position, requesting flexible working or becoming self-employed. Being able to take an adjustable income from your pension means you can select a work-life balance that suits your retirement aspirations.

3. Supplement your income

If you feel like a bit of extra income would help you live more comfortably or achieve your goals, accessing your pension allows you to top up your salary. One of the benefits of Flexi-Access Drawdown is that you don’t have to withdraw the same amount each month, it can vary to suit your plans. You may decide to withdraw a set amount each month to boost your disposable income. Alternatively, you may decide that taking out lump sums to pay for holidays or projects better suits you.

The drawbacks to consider

1. The long-term consequences

If you are thinking about taking an income from your pension before you fully retire, it’s important to keep in mind that your pension will need to financially support you for the rest of your life. Taking even relatively small amounts from your pension ten years before you retire can have a significant impact on the value of it over the long term. As well as the money taken out of your pension, you’ll need to consider how withdrawals now may affect investment returns too.

2. Your tax position

You can usually take 25% of your pension tax-free. However, you need to carefully consider your tax position if you’re thinking about accessing your pension early. Withdrawals above the tax-free amount will count as income. As a result, when added to your salary, you may find that you’re pushed into a higher tax bracket and face a bigger bill than expected. Taking money from your pension may not be the most efficient option as a result.

3. The Money Purchase Annual Allowance (MPAA)

If you’re still working, you may want to continue contributing to your pension even as you make withdrawals. However, you may find that the amount you can contribute is restricted. You can place up to £40,000 annually into a pension and benefit from tax relief, although in some cases lower limits apply. But when you first make a withdrawal, the MPAA may apply. This means you can only contribute a maximum of £4,000 each tax year to your pension and still receive tax relief.

Weighing up the pros and cons

Deciding when to access your pension isn’t a straightforward decision. There are numerous factors you should take into consideration and there’s no ‘right’ or ‘wrong’ choice for everyone. Financial planning can help you understand how accessing your pension before you fully retire may have an impact on your income and lifestyle for the rest of your life. Using cashflow planning tools, we’re able to show the impact accessing your pension early will have in relation to your goals.

Even if you do decide to supplement your income whilst working, keep in mind that accessing a pension may not be the best option. Choosing to make withdrawals from an ISA (Individual Savings Account) or another savings account, for example, maybe more efficient.

If you’re thinking about accessing your pension whilst still employed, please get in touch. We’re here to help you understand how this decision could affect your financial security in the short, medium and long term.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.